Question

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James Corp. applies overhead on the basis of direct labor hours. For the month of May, the company planned production of 10,000 units (80% of its production capacity of 12,500 units) and prepared the following overhead budget: Operating Levels 80% 10,000 25,000 Overhead Budget Production in units Standard direct labor hours Budgeted overhead Variable overhead costs Indirect materials Indirect labor Power Maintenance Total variable costs Fixed overhead costs Rent of factory building Depreciation Machinery Supervisory salaries Total fixed costs Total overhead costs $18,000 25,000 5,000 2,000 50,000 18,000 11,500 15,500 45,000 $95,000 During May, the company operated at 90% capacity (11,250 units) and incurred the following actual overhead costs: Overhead costs (actual) Indirect materials Indirect labor Power Maintenance Rent of factory building Depreciation-Machinery Supervisory salaries Total actual overhead costs $ 18,000 27,875 5,625 3,065 18,000 11,500 18,500 $102,565 1. Compute the overhead controllable variance and classify it as favorable or unfavorable. 2. Compute the overhead volume variance and classify it as favorable or unfavorable. 3. Prepare an overhead variance report at the actual activity level of 11,250 units.

Answer 1

Solution 1 and 2:

Controllable Variance
Total actual overhead		$1,02,565.00
Flexible Budget Overhead
Fixed	$45,000.00
Variable	$56,250.00
Total		$1,01,250.00
Overhead controllable variance		$1,315.00	Unfavorable
Volume Variance
Total Budgeted Fixed overhead	$45,000.00
Total fixed overhead applied	$50,625.00
Volume Variance	$5,625.00	Favorable

Solution 3:

James Corp
Overhead variance Report
For the month ended May 31
Expected production volume	80% of capacity
Production level achieved	90% of capacity
Volume variance	$5,625.00	Favorable
Controllable variance	Flexible budget	Actual results	Variances	Fav/Unfav.
Variable overhead costs:
Indirect material	$20,250.00	$18,000.00	$2,250.00	Favorable
Indirect labor	$28,125.00	$27,875.00	$250.00	Favorable
Power	$5,625.00	$5,625.00	$0.00	No Variance
Maintenance	$2,250.00	$3,065.00	$815.00	Unfavorable
Total variable costs	$56,250.00	$54,565.00	$1,685.00	Favorable
Fixed overhead costs:
Rent of factory building	$18,000.00	$18,000.00	$0.00	No Variance
Depreciation - Machinery	$11,500.00	$11,500.00	$0.00	No Variance
Supervisory salaries	$15,500.00	$18,500.00	$3,000.00	Unfavorable
Total fixed costs	$45,000.00	$48,000.00	$3,000.00	Unfavorable
Total overhead costs	$1,01,250.00	$1,02,565.00	$1,315.00	Unfavorable